Tuesday, July 20, 2021

"Bubbles, bubbles everywhere: Jeremy Grantham on the bust ahead"

 'Ol Jeremy might be dead before the bust, he's been calling this one for a while now and his calls at GMO are known as "horrifically early". See after the jump.

From Reuters:

In this manic era of meme stocks, cryptocurrencies and real-estate bidding wars, studying the history of financial markets might seem a little dry and old-fashioned.

Except to Jeremy Grantham.

The chairman of the board of famed asset managers GMO is a certified bubble-ologist, fascinated by how and why bubbles emerge. Grantham studies classic ones like 1929, but - now in his eighties - he has also lived through (and called) numerous modern booms and busts, including the dot-com wreckage in 2000, the bull market peak in 2008 and the bear market low in 2009.

In case you did not know where this is headed: He says we are in a bubble right now.

In January Grantham wrote an investor letter, “Waiting For the Last Dance,” about an inflating bubble that “could well be the most important event of your investing lives.”

Six months later, the stock market is starting to show some cracks. Grantham spoke with Reuters about this moment of market history.

Q: When your letter of warning came out, what was the response like?

A: I got a lot of pushback. Waves of Bitcoin freaks attacked me in every way possible. They said my ears were too big, and that I needed to be locked up in an old-folks home.

Q: So if we were already in a bubble then, where do things stand right now?

A: Bubbles are unbelievably easy to see; it’s knowing when the bust will come that is trickier. You see it when the markets are on the front pages instead of the financial pages, when the news is full of stories of people getting cheated, when new coins are being created every month. The scale of these things is so much bigger than in 1929 or in 2000.

Q: What is your take on equity valuations now?

A: Looking at most measures, the market is more expensive than in 2000, which was more expensive than anything that preceded it.

My favorite metric is price-to-sales: What you find is that even the cheapest parts of the market are way more expensive than in 2000.....


We have quite a few posts on Mr. Grantham, June 2020's "It's Pretty Obvious This Will End Badly": In Historic Reversal, Grantham's GMO Goes Short US Stocks  has some of the highlights.

That was followed by November 2020's "Grantham's Short Call Cost His Hedge Fund Over $2 Billion"
...The S&P 500 is at  3,633.15.

Possibly also of interest:
GMO's Jeremy Grantham Talks Sex

Which was followed by:
GMO's Jeremy Grantham Is Still Talking Sex
It's a long(ish) letter and once the guy gets started....

So, we are faced with the decision whether-or-not to play a dangerous little game, riding the bubble knowing full well it is a bubble, or retiring to the sidelines.
For now one of our favorite economists with one of our favorite stories.

Here's the version hosted at MIT:
This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare’s Bank, a fledgling West End London bank, knew that a bubble was in progress and nonetheless invested in the stock: it was profitable to “ride the bubble.” Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by such institutional factors as restrictions on short sales or agency problems...
The two most important parts of the paper "II. Hoare’s Trading Performance" and "III. Causes of Success" are definitely worth a couple minutes.

Speaking of really old banks, Hoare's is only 82 years younger than Berenberg.